S&P 500: Poised to turn or ready to run?

Sighting of a lifetime: ‘It’s a UFO!’ -- or maybe it’s not

Some years ago (and we know we’re dating ourselves with this story) a camping trip to Alder Creek on the southern slopes of the Mt. Hood National Forest in Oregon yielded some interesting observations one memorable night. Two 10-year-old buddies and the father of one, Keith, were resting around a carefully tended campfire with Keith telling oft heard and classic stories. A fine writer who was able to catalogue all the sights and sounds he had observed over the years, Keith was telling the pair about flying saucers, or UFOs, one of his favorite subjects. It was that decade, midway through the 1950s, when UFO sightings were almost as prolific as Fords and Chevys.

Resting on their backs and peering into the night sky in search of an adventure, the buddies were listening to Keith intently when Ron jumped to his feet and yelled, "Dad, look! There’s one!"

The three campers quickly searched the star-speckled, jet black sky and saw, sure enough, a white dot ambling toward them from the southwest horizon. Slowly and deliberately the speck came closer and closer. Keith, who was never short on imagination, kept accelerating his levels of excitement with the boys in eager tow.

"Holy honickers! This could be the big one, guys! And almost in our own backyard! I knew it would happen. You betcha!"

A few minutes later the white dot was almost overhead and the three could hear not only the drone of the prop-driven DC-6 engines propelling the passenger liner toward its final approach into Portland International Airport, but they could see the flashing red and white lights on the airplane’s wings.

No UFO this time.

…

So what does this story have to do with the stock market?

For the better part of this trading year, the major market indexes have been tracing out what could prove to be a Head and Shoulders distribution top. The "Left Shoulder" of the pattern was formed back in January. Then came the possible "Head" of the pattern with the creation of the late April price highs. And now comes what could be the creation of a potential "Right Shoulder" of the pattern. While the "Neckline" of the formation is somewhat convoluted to the extent it is not completely horizontal and has a downward slope that was exacerbated by the early May mini-Crash, there is nevertheless enough definition in pricing to give pause to those who continue to believe that price weakness from later April until early July should prove to be nothing more than a pullback in an otherwise favorable bull market that was initiated in March 2009.

But this market also has some specific definition – nothing but new highs will re-assert the bull trend despite all the wishful thinking and statistical justifications. Fact is, the short-term rally that began after the July 6 index price lows has been fuelled by anemic upside volume. While that lack of participation could be attributed to traders away on vacation, it is nonetheless true that Cumulative Volume has been weak for months and was deteriorating well before the traditional vacation season began. In fact, CV is currently back to levels not seen since just a month after the March 2009 lows.

Short-term Momentum has also failed to confirm slightly higher highs in index prices over the past few weeks. And our proprietary Trading Oscillator on that smaller cycle is now as "overbought" as at any time over the past five years.

On the plus side of the ledger, Intermediate Cycle statistics are not yet overheated even though prices stalled in the face of resistance for the better part of last week’s trading.

In sum, we are left with much the same problem we’ve had for the better part of the past four months – index prices could be in the midst of a corrective phase and new highs could follow. Or, that potential Head and Shoulders pattern just might turn out to be more than a false UFO sighting and could prove to be the real thing. To decide the H&S possibility the S&P 500 index must decline below its July 1 low at 1010.91 with the Dow Jones Industrial Average sinking below 9614.32. Such action would not only resolve the current stalemate, but it would re-assert an already negative Intermediate Cycle and set the market up for further losses.

On the flip side, bulls need to power prices higher and above those April 26 highs at 1219.80—S&P 500 and 11258.01—Dow 30. In the meantime that white dot continues to move closer.

McCurtain Most Actives Advance/Decline Line (MAAD)

MAAD using daily data peaked back on July 27 while the larger trending Weekly Cycle moved higher last week. While lesser cycle data tends to be more sensitive, the important point to note between the two cycles is that both remain positioned below the late April plot highs. And because of the market’s current indecision relative to those highs, it remains to be seen if MAAD on either cycle will make new peaks.

We’ve pointed out over the past several months that MAAD relative to the March 2009 lows has shown little upside enthusiasm over the past 16 months to suggest that Smart Money, which the indicator measures, has remained less than enthusiastic about market prospects. As a consequence, it wouldn’t take much selling to propel MAAD to new lows on BOTH the Minor and Intermediate Cycles to put a very negative pall over the market.

Nonetheless, until such negativity develops, we cannot preclude the possibility that MAAD could seriously challenge those April highs, given the fact the indicator did not demonstrate weakness to the same extent as did index prices over the past four months.

Click charts to enlarge

McCurtain Call/Put Dollar Value Flow Line (CPFL)

CPFL moved higher on both the Minor and Intermediate Cycles last week. Neither series, however, has made new statistical highs above the late April plot highs. Both series also remain above the late June statistical lows.

What now remains to be seen, just as with MAAD, is if the bullish camp has the power to push market prices upward enough to cause both MAAD and CPFL to new highs for the move that began in March 2009, so confirming the larger uptrend.

As we have mentioned before, we have never seen an instance where new highs were sustainable if CPFL did not confirm that action. Put another way, if new highs for the market follow and CPFL does not go along for the ride, the staying power of strength would be highly suspect.

Click charts to enlarge

Conclusion

Market prices rallied last week. The short-term trend had a bit more life breathed into it. But the status of the larger Intermediate Cycle remains in doubt – nothing but new highs above the late April price levels will re-assert the Major Cycle uptrend. Nothing.

On the other hand, an upside failure in the current environment with the minor cycle now looking a bit tired and the larger Intermediate Cycle still negative would not bode well for market optimists.

Nonetheless, "it ain’t over ‘til it’s over". There is an upward bias to market pricing currently to the extent the minor cycle remains viable. Intermediate Cycle stats are still moderately "oversold." And there is a very high level of uncertainty that could work in favor of the bulls given the fact that the markets have remained in a relatively narrow trading range for the better part of the past year, the May mini-Crash notwithstanding.

MAAD data for past 30 Weeks* CPFL data for past 30 Weeks

Date

NYSE Adv

NYSE Dec

Date

OEX Call $Volume

OEX Put $Volume

1-15-10

5

15

1-15-10

171920

238731

1-22-10

3

17

1-22-10

166423

728001

1-29-10

8

12

1-29-10

230439

706372

2-5-10

7

13

2-5-10

393336

868741

2-12-10

10

10

2-12-10

252621

233578

2-19-10

15

5

2-19-10

308216

96223

2-26-10

7

13

2-26-10

259727

180469

3-5-10

16

4

3-5-10

447149

104117

3-12-10

17

3

3-12-10

1828237

111309

3-19-10

9

11

3-19-10

656439

147348

3-26-10

15

5

3-26-10

232614

113862

4-2-10

13

7

4-2-10

153692

138948

4-9-10

17

3

4-9-10

310430

99415

4-16-10

11

9

4-16-10

684317

282231

4-23-10

15

5

4-23-10

1049228

141637

4-30-10

2

18

4-30-10

139488

363448

5-7-10

3

17

5-7-10

929902

2329559

5-14-10

14

6

5-14-10

263151

730414

5-21-10

5

15

5-21-10

1172844

1654053

5-28-10

10

10

5-28-10

477797

584893

6-4-10

5

15

6-4-10

265339

515370

6-11-10

12

8

6-11-10

263791

544655

6-18-10

11

9

6-18-10

357965

119532

6-25-10

5

15

6-25-10

91068

599114

7-2-10

4

16

7-2-10

1034509

771231

7-9-10

18

2

7-9-10

635690

110808

7-16-10

9

11

7-16-10

171633

445073

7-23-10

16

4

7-23-10

322870

174663

7-30-10

15

5

7-30-10

199970

217368

8-6-10

15

5

8-6-10

271701

115037

*Note: All data is for week ending on Friday even though ending date may be a holiday.
Unchanged issues in MAAD calculations are not counted.